Vendors in FairPoint bankruptcy case find lots of companies are eager to buy their debt

Vendors in FairPoint bankruptcy case find lots of companies are eager to buy their debt

Published: March 26, 2010

When Larry Major, credit manager of Pike Industries in Belmont, received a letter from a firm seeking to buy Pike's $12,700 bankruptcy claim against FairPoint Communications for more than $6,000 cold cash he couldn't believe it.After FairPoint filed for Chapter 11 bankruptcy protection last October, Major wasn't sure whether his firm would receive any money for the work it did -- redoing manholes for the telephone company in Maine. Major remembered thinking after reading the offer, "Yeah right. Like this is for real?"But it was a real offer. Indeed, it was the first of many."My fax machine was lit up with offers. It was a bidding war. Companies I never heard of were begging to for us sign up with them," Major said.When Major finally did sign, with Pioneer Credit Opportunities Fund, a claims-buying firm based in New York City, about three-quarters of the claim was wired to the paving company's bank account the very next day.Pike's isn't the only claim against FairPoint that Pioneer bought. Bankruptcy court records as of March 19 show that Pioneer has so far purchased $750,000 worth of debt from 26 creditors. Nor is it the only claims-buying firm to do so. So far, 10 firms have purchased more than $2.2 million of FairPoint debt from companies throughout the state and the nation, ranging in size from the $47,000 debt held by Hunter North Associates, a security firm based in Spofford, to a $600 claim filed by Martile Plumbing and Heating Inc. of Dover. The $2.2 million only reflects deals filed with the Bankruptcy Court, and those deals are growing every day (with $126,000 worth of claims filed on just March 18 and 19 alone) as the FairPoint reorganization plan moves forward to final approval, perhaps by the end of April. Even if the total amount of purchased claims doubled, they would only add up to a fraction of the $85 million FairPoint owed to various vendors before declaring bankruptcy. (The $85 million is itself a fraction of the $550 million owed to bondholders and the $2.1 billion owed to lenders).But making even $1 million on a bankruptcy is not a bad deal, given that the number of business bankruptcies climbed to nearly 30,000 in 2008 -- nearly double the number in 2006, and that was before the economy tanked. Indeed, bankruptcy has become big business, growing at a phenomenal rate.If you count the 2008 Lehman Brothers filing, the bankruptcy claims market is estimated at more than $1 trillion, with about $300 billion in general unsecured debt. In 2008, only $2 billion went into the hands of speculators, according to Secondmarket, a marketplace and auction platform for illiquid assets, including bankruptcy claims.Just last month, some 1,417 bankruptcy claims for $723 million were traded -- an all-time record for trading activity, according to Secondmarket. Huge bankruptcies, such as those filed by Lehman, General Growth Properties (owner of the Steeplegate Mall in Concord) and Smurfit Stone Container Corp. accounted for many of the transfers last month.Certainty and liquidityThe FairPoint filing may be big news to northern New England. After all, the company bought Verizon's landlines in March 2008, and after a terrible transition filed for Chapter 11 reorganization a year and a half later, a case involving hundreds of creditors, regulators in three states, Wall Street bondholders and some major banks. But it is just a middle-of-the-road filing for claims-buyers like Creditor Liquidity, a company based in Armonk, N.Y., that has thus far bought up 36 FairPoint claims ? more than any other company ? for $500,000."We're busy," said Bob Tannor, a principal of the company, which was formed at the beginning of 2009. "The sheer volume is amazing." According to Tannor, across the nation, there are 1,500 Chapter 11 business bankruptcies every month.Not all bankruptcies are ripe for claims trading. Creditor Liquidity doesn't bother chasing down the claims of small bankrupt businesses with less than $2 million in debt. And it is hard to compete against major Wall Street firms that go after major bankruptcies like Lehman Brothers or General Motors.And within that window, the claims trader has to evaluate which reorganizations will actually be successful. And when they do, they then must evaluate what percentage of the claim to offer creditors -- to ensure that the offer will be high enough to be fetching for a company sitting on debt that it is not sure it will ever collect, yet low enough to make a profit that is worth the risk."Sometimes we are wrong," said Tannor.Still, it's a good deal for the claim buyer, "because they are seeking to get paid. They may have been waiting for years, and certain cases may take more years. And we accept a lot of risk."Creditors don't only stand to gain in certainty and liquidity, said Tannor. A claims-buying firm might be able to get paid more simply because it has a bigger seat at the table.Any creditor, of course, can file its own paperwork and show up at bankruptcy court, and make a case directly or through the Official Committee of Unsecured Creditors. But many don't, or don't do it correctly, or can't afford to hire an attorney to travel to a court that could be hundreds or even thousands of miles away. (The FairPoint bankruptcy is being heard in New York City.). Even creditors who do take the time and make the effort "have very little visibility in the process -- little or no say in terms of outcome," Tannor said. But Tannor is now one of the largest unsecured creditors in the FairPoint case (excluding the bondholders), and as a former corporate bankruptcy specialist at the Ernst & Young accounting firm, he's a relatively sophisticated creditor, one who might actually be able to influence the process. An 'economic force'There is some concern that claims traders buy up claims just to influence the bankruptcy process. Bankruptcy courts have actually ruled on whether claims traders are distorting the process, or what is the motive to buying a claim.One paper before an American Bankruptcy Institute workshop in 2008 quotes some critics who alluded to claim traders as "those who swoop in and seek to slice the economic pie for their own benefit and bar other players from having a role in the reorganization."Others, however, maintain that claims traders make the process more efficient by consolidating debt.But that claim, like much of claims-trading law, is far from settled. The claims-trading industry is relatively new, started in the leveraged buyout frenzy of the 1980s. It helped bankruptcy courts clarify their requirements in 1983 so that a claim trader only has to file a notice of transfer with the court. The court then notifies the creditor, to give it a chance to contest the transfer, but did not require that the trader tell how much it paid for the claim. That way, competitors are kept in the dark about how much others were getting.
Another ruling in 1991 limited the court's jurisdiction in claims-trading cases, opening the doors still further as another unregulated market for capital in the hey day '90s. The Great Recession starting in 2008 pretty much opened the flood gates.
Even so, only 5 percent of claims are traded. Some creditors figure that the very fact that a company is offering cash for their claim means it must be worth more and hold on to it.
Others, like Major, suspect a scam of some kind.
But Bruce Harwood, a bankruptcy attorney with Sheehan Phinney Bass + Green and an expert in claims trades, said that most firms are legitimate.
"It's become an economic force in itself," he said. "It's a market, like any market, but you need to check out the agreements. Some are very complicated."
Almost all agreements require actual proof of claim before sealing the deal, and have a caveat that the trader could go after you if the proof was challenged and the court found that the claim was not legitimate.
In some agreements, the creditor gets paid shortly after the transfer is filed. In others, the creditor might not get paid until after a settlement plan is approved. And there might be clauses in the agreement to limit the amount if the trader underestimated the amount a claim would be paid.
"They need to view an agreement with a professional," agreed Tannor. "There are some firms that hold their check to the end. We send ours in a few weeks and never had a complaint."
Indeed, Major said his attorney looked at the deal, and he tweaked the agreement to make sure the trader doesn't have too much wiggle room "to duck out" of paying Pike Industries the percentage agreed upon.
In the end, Major was happy to get cash. After all, in the FairPoint case, the unsecured creditors will likely be paid in stock of the newly reorganized FairPoint: about 4.2 million shares.
How much that stock would be worth is anybody's guess. The plan estimates that, for unsecured creditors, the estimated percentage of recovery would be about 17 percent -- a lot lower than the offers now being circulated. But that figure applies to the class of unsecured creditors as a whole -- primarily bondholders -- and large chunks of these claims may be ruled illegitimate for one reason or another.The creditors that traders are after -- a vendor with an invoice in hand -- is likely to have their claim upheld.
But Pike wasn't interested in taking its chances with FairPoint stock.
"We are pretty happy being in the paving business," Major said. "We don't want to be in the telecommunication business. We have enough trouble with the phones in our office."
Bob Sanders can be reached at bsanders@nhbr.com.These are the groups on record as buying up claims relating to FairPoint as of March 17, according to bankruptcy records. The amount is the claim, not the amount the company received.Investor#ClaimsAmountPioneer Credit Opportunities Fund LP26$739,016Creditor Liquidity LP36$476,862Tr Capital LLC9$366,680Export Development Canada1$136,756Liquidity Solutions Inc.18$136,512Fayette Group LLC1$76,046ASM Capital LP13$54,199Claims Recovery Group LLC16$27,357Sierra Liquidity Fund LLC6$9,354Fair Harbor Capital LLC2$2,685Here is the list of New Hampshire firms that sold their debt thus far:NameTownAmountHunter North Associates LLCSpofford$47,234.25Elite InstallationsMerrimack$24,360.00Mclane Graf Raulerson & MiddletonManchester$14,003.00Pike Industries Inc.Belmont$12,719.54George J Foster & Co., Inc.Dover$10,754.82Union Leader Corp.Manchester$10,492.00Telegraph Publishing CompanyHudson$8,479.00Norton Asset Management Inc.Manchester$7,020.00Cushing & SonsWalpole$5,655.00Mt Washington Radio & Gramophone LLCConway$4,222.80Winnipesaukee Truck Parts & Repair LLCBelmont$2,846.00Nutfield Publishing LLCLondonderry$2,226.00Laconia Electric SupplyLaconia$1,761.94Blu-Dawg Computer CenterConway$1,531.00Excel Mechanical ServicesCenter Harbor$900.00Burts General Repair & WeldingLancaster$775.00New Hampshire Distributors Inc.Concord$734.37Fays Boat Yard Inc.Keene$623.00Martel Plumbing & Heating Inc.Dover$600.00Nes Fire & SafetyBerlin$535.00

This article appears in the March 26 2010 issue of New Hampshire Business Review